Stocks could retest the highs in the latest potential Fed rate hike: Fundstrat

• Fundstraat said stocks are facing a “make or break” moment this week and could rise to 4,750.
• That’s because the Federal Reserve may soon issue its latest rate hike, which is expected to be bullish for stocks.
• Lee said that the decline in inflation indicators and the limited impact of the banking turmoil supports this view.

Stocks face a pivotal moment this week as the Federal Reserve could deliver the last rate hike in the tightening cycle — a move that could cause the S&P 500 to retest its all-time high from early 2022, according to Fundstrat’s Tom Lee.

In a note on Monday, Lee cited broad expectations that the Fed will raise interest rates by 25 basis points this week, after raising rates by 475 basis points last year to reduce inflation.

Markets are putting an 86% chance of a quarter-point increase after the next policy meeting closes on Wednesday, and a 62% chance that the Fed will start pausing interest rates in June, according to CME FedWatch.

Lee said the Fed pause could be a “make or break” moment for stocks, as sharp interest rate increases have hit stocks hard in 2022.

“This is likely to be the last increase of the cycle. This is a changing thesis,” Lee said, predicting the S&P 500 would reach 4,750 by the end of 2023, near its record high of 4,796 in January last year.

Lee said this is largely because easing inflation indicators may pressure the Fed to back down from its tightening monetary policy. Prices have been on a downward trend since June last year, including in major categories such as housing and manufacturing.

Although the First Republic renewed banking turmoil, it is unlikely to lead to financial contagion, Lee said, suggesting the Fed is likely to make its latest rate hike this week anyway.

He’s been bullish on stocks through most of the bear market, previously predicting that the S&P 500 would hit another all-time high in 2022, the year the benchmark fell 20%.

Most recently, he predicted the index would see its strongest rally this year in April, though stocks rose a modest 1% last month, short of Lee’s thesis.